Specialty insurers covering the energy sector all carry a high-risk profile. Despite that volatility, investment income has helped the group produce positive operating results over the last five years, A.M. Best Company said in a new report.

“Specialty insurers operating in the energy sector consistently have produced positive operating results over [2009-2013], the report concluded, based on pretax operating returns. “This is largely the result of very strong investment income supplementing underwriting results, which have been more volatile over this period.”

A.M. Best bases its evaluation on the specialty insurers and industry captives that compete in the commercial market for the energy sector’s insurance premiums. There are eight major ones, according to the report, including four specialty insurers, three single-parent captives and one electronic cooperative that “serves as a reciprocal exchange structure” for rural utilities.

They are: Associated Electric & Gas Insurance Service, Nuclear Electric Insurance Ltd., Energy Insurance Mutual, Oil Casualty Insurance Ltd., Bison Insurance Co., Palms Insurance Co., Federated Rural Electric Insurance and AES Global Insurance Co.

A.M. Best notes that a high exposure to property catastrophe events leaves the group with a high-risk profile and widely fluctuating earnings, excluding investment income. That has left the group’s collective combined ratio ranging from 90 to 140, and a five-year average of 104 as of the end of 2013, according to the report, versus the 102.9 average combined ratio of the commercial casualty composite, A.M. Best noted.

A saving grace has been investment income. As A.M. Best pointed out, “the group has a well-diversified investment portfolio that provides both adequate liquidity and investment income,” and that its assets are tilted overall “toward more conservative investments” What does this do? It helps make principal more secure, and give the sector more predictable investment returns, according to the report.

One caviat – the specialty insurers’ investment portfolio collectively is stilted a bit more to public equities, versus the broader commercial casualty composite. The goal: to bring the sector higher risk-adjusted returns, as A.M. Best said.

A.M. Best pointed out that the group expects between 4 percent and 5 percent in premium growth in 2014, with directors and officers liability serving as a bright spot in their product roster. But A.M. Best warned that utilities still must deal with a challenging business environment that faces more obstacles than other commercial casualty clients. Those unique risks include natural gas leaks, nuclear plant shutdowns, an increasingly complex energy pipeline infrastructure, infrastructure weaknesses and storm preparations. There’s also fracking, an issue that doesn’t hit other commercial casualty or property clients.

A.M. Best urged insurers that cover the energy sector to stay ahead of the curve and talk regularly to their utility clients to make sure they’re responding to changing market needs. With that under control, insurers must help their clients develop risk management programs and be deft enough to respond to any shortcomings that erupt along the way, A.M. Best said.

Source: A.M. Best